I recently wrote about hedge manager Philip Falcone's biggest bet of his career; well apparently, it has proven too big for Goldman Sachs
Falcone has been extremely successful throughout his career finding value in distressed companies, while also making money on the short side, betting against financial stocks, but his most recent bet is unlike any of his others.
Falcone has allocated 90% of his hedge fund's $3.4 billion in assets to wireless telecommunications, as he attempts to create his own wireless 4G network to compete with the likes of AT&T
Falcone is already facing an uphill battle as Sprint
Troubles for Falcone
It is not known if Goldman Sachs or Blackstone soured on Falcone's business idea. However, according to Bloomberg, it is believed that Goldman Sachs is unhappy with Harbinger's poor performance year to date, as well as a disclosure by Harbinger that Falcone borrowed $113 million from a smaller fund in which withdrawals were suspended due to assets being tied up as a result of the Lehman Brothers bankruptcy. He used the funds to pay personal taxes.
If Falcone's Harbinger fund is faced with a flood of redemption requests as a result of this news, it may be forced to sell assets. Many believe that Harbinger does not have the funding to match established telecom leaders. It took Clearwire
Perhaps of greater concern to smaller individual investors is if Harbinger needs to unwind some of its equity positions. Falcone is known for making large concentrated bets in his portfolio, and currently some of his largest positions are in some very illiquid stocks. This means it will be more difficult for investors to unload shares if necessary.
For example, Harbinger's largest U.S. equity holding is in Spectrum Brands
Harbinger requires 90 days' notice to begin redemptions once a withdrawal request is received, and it will only return 25% of a client's assets each quarter. Goldman Sachs has $120 million invested with Harbinger, so the maximum withdrawal of its $30 million a quarter is manageable. Falcone told MarketWatch that his fund will able to meet redemptions without liquidating any of his LightSquared assets or spectrum. However, the big question is whether other large investors follow suit. If this happens, Harbinger becomes vulnerable.
It is still unknown if Goldman and Blackstone will follow through with the redemption requests and if this will cause others to make similar requests, but any more large withdrawals could put a serious wrench in Falcone's grand plans. With Clearwire struggling and Falcone's plans continuing to look dicey, the incumbent giants of wireless continue sleep a little easier at night.
Andrew Bond owns no shares in the companies listed. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.